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Treasury Throws a Wrench Into QE-Infinity


Last minute Treasury auction could create a liquidity issue.

MINYANVILLE ORIGINAL Tuesday was an interesting day as the market gapped lower, reversed strongly higher, and then retraced most of the rally by the end of the day. The market remains balanced at a key support zone, and the market is very oversold, so while those conditions could lead to a rally, oversold by itself doesn't mean anything. As I've noted on several occasions, crashes generally begin when a market is oversold, not when it's overbought. A lot hinges on what happens next.

I've poured over many charts this week, and I continue to feel this zone is critical for bulls to defend. Below this level, and there's simply a lot of air. I'm watching the charts for the market to declare its intentions, but there are two fundamental issues which could compound the technical situation and combine to create a "perfect storm" if support fails:

1. We are again facing the "fiscal cliff" dilemma. This was a precursor to the 2011 crash.

2. Bulls have been banking on roughly $26 billion in QE-Infinity liquidity injections, due to start hitting the Primary Dealer accounts on November 14, to provide fuel for equities. However, there has been a potential last-minute game-changer for this month. The Treasury announced on November 13 that it will auction $25 billion in Cash Management bills on, you guessed it, November 14. That auction will absorb much of the pending QE-Infinity liquidity.

A failure of support here thus has the potential to compound a selling-panic, because bulls may capitulate en masse if it's perceived that Fed cash isn't back-stopping equities as expected.

So this remains a dangerous position for the market, as I warned when SPX 1425 failed, and warned again when SPX 1403 failed. Bulls who got out then can always get back in if and when the market starts giving more signs of a turn. A wise old trading adage: "Better to be out wishing you were in, than in wishing you were out."

A favorite chart of mine recently (below) shows that most markets are sitting right on support zones. Bulls need to hold these zones, or the market could easily go into free-fall. Be aware that markets often become very whippy around major support and resistance, as they try to shake traders out and/or get them positioned wrong.

Click to enlarge
No positions in stocks mentioned.
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